Obesity Research & Clinical Practice (2008) 2, 83—89
REVIEW
Obesity and time-inconsistent preferences Mark Dodd ∗ School of Economics, The University of Adelaide, SA 5005, Australia Received 12 March 2008; accepted 22 April 2008
KEYWORDS Obesity; Economics; Intertemporal choice
Summary As obesity becomes a major health and economic issue of the current age, interventions and policies are being targeted to influence individuals’ diet and exercise behaviors. Examining the deviations of reality from a baseline model of rational choice provides insights into the economic rationales for interventions to modify individuals’ choices. In addition to the more classical economic rationales for intervention, insights from behavioral economics and psychology have recently led to a focus on the role of time-inconsistent preferences, in particular presentbiased preferences, in the choices that lead to obesity. While individuals can use self-control techniques to mitigate the problem, there is also potential for targeted interventions and policies to improve the welfare of individuals. Further interdisciplinary research in the area may lead to behavioral obesity interventions tailored to individuals’ incentives, resulting in higher compliance rates. © 2008 Asian Oceanian Association for the Study of Obesity. Published by Elsevier Ltd. All rights reserved.
Contents Economic rationales for behavioral obesity interventions..................................................... Intertemporal choice and time-inconsistency ................................................................ Internalities and taxation .................................................................................... Self-control mechanisms and the Coase Theorem ............................................................ Policy implications ........................................................................................... References .................................................................................................
Economic rationales for behavioral obesity interventions It is well accepted that obesity is costly to individuals and society in terms of financial costs, life years, ∗
Tel.: +61 8 8303 4931; fax: +61 8 8223 1460. E-mail address: [email protected].
and quality of life. The fact that in most cases obesity can be influenced by lifestyle choices, including diet and exercise regimes, makes it an extremely complex issue. Consumer sovereignty is a concept often championed by economists. If a consumer makes an informed and rational choice to consume junk food, then attempting to modify this optimizing choice
1871-403X/$ — see front matter © 2008 Asian Oceanian Association for the Study of Obesity. Published by Elsevier Ltd. All rights reserved.
doi:10.1016/j.orcp.2008.04.006
83 84 85 86 87 87
84 will likely make the consumer worse off. We assume that this individual is attempting to maximize their utility (or well-being), and they will make the choice to consume only if the benefit they receive from the consumption exceeds the costs, which in the case of junk food should include all future health and financial costs caused by the addition to the waistline. Thus under a model of rational choice in a perfect world, we should assume that an individual’s exercise and diet choices should be optimal without any intervention. In this scenario, intervention by a third party into the individual’s decision process is not only unnecessary but is also likely to make the individual worse off, since the third party cannot perfectly know the individual’s preferences and thus is likely to unintentionally cause deviations from optimal choices. This hypothetical situation is not necessarily reflective of the real world, but it provides a benchmark from which to assess the relevance of intervention. For there to be an economic rationale for external interventions to be able to increase social welfare, they should attempt to mitigate the damage caused by market failures (the deviations from our ‘perfect’ scenario). To paraphrase two recent articles on this topic, these market failures in the case of obesity can be caused by externalities, information deficits, or imperfect rationality [1,2]. Optimal market outcomes are often based on concepts of efficiency, and only rather weak concepts of equity,1 so policy makers may also wish to intervene based on their own stronger beliefs regarding the distribution of personal welfare. Externalities occur when costs or benefits of a decision are incurred by parties external to the decision. In the case of obesity, the most commonly considered externality is that of a portion of an obese individual’s increased health care costs being funded by other taxpayers through public health care. Under this scenario individuals will rationally (implicitly) choose an inefficiently high level of obesity, since they do not consider the full costs of obesity, only the costs that they face personally. External costs can result not just from public health care, but also private health insurance, tax and social security systems, and in many other situations where obese individuals cost more but do not fully pay for this increased cost themselves. Theoretical modeling of the external costs and consequent deadweight loss to society, as well as estimating these costs has been undertaken by 1
Competitive market equilibria satisfy Pareto optimality, meaning that there do not exist other possible outcomes in which all individuals are at least as well off as in the equilibrium, but in which some are better off.
M. Dodd a number of researchers (e.g. [3—6]). It should be noted that many of the externalities of obesity are not inherent to the issue, but caused by certain ‘imperfections’ that have been built into the market. For example, in the case of health insurance, there would be no externality if obese individuals were forced to pay actuarially fair insurance premiums, that would be higher to take into account their expected future costs [3]. It is the regulations that make it impossible to charge different insurance premiums based on measures of obesity (such as community rating) that cause the externality problem in this case. Information about the consequences of overweight and obesity, as well as information about the effect of diet and exercise on health are likely to be under-provided in a competitive market. Much of this information is non-rival and nonexcludable, making it a ‘public good’ and therefore under-provided by a competitive market. There is evidence that food-labeling regulation can reduce weight [7], and that health knowledge is related to weight [8,9]. There is also a role for government in ensuring that misleading advertising is minimized, since this can clearly adversely affect choices [10]. The rational choice model does not propose that individuals make all their decisions by explicitly going through complex maximization processes. Rather, they will employ heuristics and other decision tools such that they will act optimally, as if they had maximized explicitly. There are potentially many sources of imperfections in rationality that can lead to suboptimal choices being made. Perhaps the most obvious in the case of obesity is the problem of time-inconsistent preferences, and this will be discussed in the following sections. Another problem is in the case of children, who may not have the capacity for complex rational decisionmaking, and for example, can be more influenced than adults by persuasive advertising [10,11]. There are potentially many other imperfections in rationality, including for example the tendency to eat more when presented with larger portion sizes [12—14]. It may also be considered that unhealthy choices are ‘addictive’ by certain definitions. Gruber and K¨ oszegi [15] contrast a model of rational addiction with a model of time-inconsistent preferences and find that they have much in common.
Intertemporal choice and time-inconsistency When immediate decisions of diet and activity are made, the individual should incorporate the
Obesity and time-inconsistent preferences future health consequences into their decisionmaking process. Therefore we need some theory of intertemporal choice, or of how wellbeing is compared between time periods. Samuelson [16] developed the model of exponential discounting, which means having a constant discount rate and represents time-consistent preferences.2 With exponential discounting, an increase in the discount rate would lead to a higher level of overweightness in the population, since the future health costs are discounted more when they are compared to the current (non-discounted) enjoyment [17]. It has been proposed that the increase in obesity in recent years may be due to a general increase in people’s discount rates, but no strong evidence of this has been found [18—20]. An excellent review of economic thought on time preferences, as well as the evidence against the exponential discounting model is given by Frederick et al. [21]. There is much evidence that people have time-inconsistent preferences, and in general, present-biased preferences.3 Strotz [22] was one of the earliest economists to formalize discussion of time-inconsistency. This area has since become a burgeoning field of literature in both economics and psychology [21,23,24]. There are many models that mathematically derive and investigate the theoretical suboptimal outcomes caused by present-biased preferences [25—28].4 There are also many papers discussing 2 If you had a constant annual discount rate with respect to money of 5%, then you would place the same value on $100 received today, on $105 received next year, and on $110.25(=$100 × 1.05 × 1.05) received the following year. Samuelson’s exponential discounting model proposes that a discount rate can be applied to utility in this way, and that the same discount rate is applied between every adjacent pair of periods (e.g. the 5% rate in our example; a counter example would be a case where the discount rate between year 1 and 2 is 5%, but the discount rate between year 2 and 3 is 4%). The time consistency that results from a constant discount rate means that (absent other changes) an optimal choice made for the future should still be the desired choice when the future time period is reached. 3 For example if one was asked today if they would prefer $100 in 10 years or $101 in 10 years and a day, then they may chose the later $101 payment, but 10 years from now if asked would they prefer $100 today or $101 tomorrow they would chose the earlier $100 payment. If this change is not based on the revelation of information or changed conditions, but only on the timing, then a person who acts like this has present-biased time-inconsistent preferences. 4 Many economic models of present-biased preferences are based on a quasi-hyperbolic discounting functional form, developed by Phelps and Pollak [61] in an intergenerational setting, and brought to the within-individual intertemporal choice setting by Laibson [62]. This functional specification succinctly captures the qualitative aspects of present-biased preferences by allowing for the same discount rate amongst each adjacent
85 the underlying fundamental psychological determinants of these types of preferences, including projection bias, reference points, visceral influences, melioration and impulsivity [24,27,29—32]. In the case of obesity there are still few empirical results to back up the theory, so more research is needed. Nederkoorn et al. [33] find evidence that obese women tend to have higher than normal impulsivity by one particular measure, but not by other measures. Stutzer [34] finds, using proxies for ‘experienced utility’,5 that obesity reduces wellbeing only for those who report limited self-control, thus providing evidence of an obesity-related selfcontrol problem leading to suboptimal outcomes. Wonderlich et al. [35] find a positive relationship between a behavioral measure of impulsivity and eating disorders. Ryden et al. [36] find a positive relationship between obesity and impulsivity for men only. Other evidence involves the ‘smoking guns’ of costly self-control behaviors, that logically would not be necessary were this problem not to exist, and these are discussed in greater detail in the self-control mechanisms and the Coase Theorem section.
Internalities and taxation The most basic potential outcome of presentbiased preferences is, that when planning for future actions an individual may optimally wish to choose a healthy diet and lifestyle, but at every instant will be overpowered by their present bias and wish to eat unhealthily and be inactive, leaving the healthy lifestyle to start tomorrow. If we are trying to maximize the individual’s welfare, it is difficult to know how to weight the conflicting interests of the longterm planner and the present doer [37]. It is usually proposed that the decisions that would be made by an individual planning for the future would be the most ‘correct’, and welfare analysis is often based on this, although this should not be taken for granted [28,37]. Essentially, when choosing to consume unhealthy foods, the present self is imposing ‘external’ costs on the long-term self.6 The term ‘internality’ has recently been coined to describe this situation,
future period, but a different discount rate between the present and the first future period. 5 As the phrase suggests, experienced utility is the actual experienced ‘hedonic quality’, and may differ from the ex ante expected utility used in decision-making [63]. Stutzer [34] uses subjective reports of wellbeing as a proxy for experienced utility. 6 The multiple-self model clearly is just a useful theoretical construct and is not intended to be taken too literally.
86 evoking similarities with the more commonly considered case of an externality [32]. A classic solution to an externality problem is to use a tax to increase the costs personally faced by the producer of the external costs to the full social cost, thus ‘internalizing’ the external costs and leading to the socially optimal level of consumption and production (a carbon tax is a good example of this). Similar to a ‘Pigouvian’ tax on an externality as described, it has been proposed that optimal taxes can be put in place to improve welfare in the face of an internality problem, with even those bearing the tax potentially supporting it due to its self-control functions [38—40]. It may be possible to put in place a tax that results in a Pareto improvement over the pre-tax state, that is, everyone is at least as well off as before, and some are better off. O’Donoghue and Rabin [38] describes such a scheme, whereby the selfcontrolled are better off due to a redistribution of wealth to them from the people with self-control problems (since the tax is borne more by those with self-control problems), yet the people with selfcontrol problems are better off since their gain in utility from the externally imposed influence reducing their self-control problems is greater than the loss from taxation.7 Although possible, it is highly problematic to tax obesity directly, and instead the usual proposition is to tax products that cause obesity, such as junk foods. Since relative prices are important in consumption decisions, subsidies (which are basically negative taxes) on healthy products could perform a similar function. Some theoretical and calibrated modeling has been done on the issue of a ‘fat tax’ [41—45], and there has been much discussion of the complex issue in the literature [46—49]. French et al. [50] show that consumption of healthy snack foods can increase significantly with relative price cuts. Cutler et al. [51] suggest that changes in the relative costs of foods (including time-costs) driven by technological change may be a leading explanation for the rise in obesity over recent years. The reduction in food costs has been biased towards unhealthy foods, and worryingly, there is evidence that the relative cheapness of unhealthy foods is still increasing [52]. An important factor to consider is the responsiveness of consumer demand to prices of obesity encouraging products. If the consumers with selfcontrol problems in fact are not sensitive to price, 7
Another interesting result from the modeling and calibration exercises of O’Donoghue and Rabin [38] is that the optimal tax may still be quite large even when self-control problems are quite small.
M. Dodd then taxation will not perform its self control function, instead penalizing further those with selfcontrol problems. How responsive consumers will be to a ‘fat tax’ depends specifically on how it is constructed. Whether any tax will be borne by the consumers or the producers is another important issue, as well as the intended and unintended effects of the tax on the content of the food produced. And of course, there are equity issues involved since any food tax tends to be regressive. However in the similar case of cigarette taxation, it has been argued that this internality effect makes the taxes less regressive, since the price elasticity of demand for cigarettes will be higher for lower income individuals, and thus the tax will have a greater self-control effect for them [53]. Current estimates of the price elasticity of demand for particular goods or categories of goods will not necessarily be good predictors in a completely different price environment where a large group of goods are priced differently, due to the complex substitution amongst goods. Most proposed schemes of taxes and subsidies will lead to price environments sufficiently different to the current environment such that current estimated elasticities may not be appropriately applied in those contexts, and thus detailed and specifically tailored analysis of any such scheme is essential.
Self-control mechanisms and the Coase Theorem The Coase Theorem states that when trade in an externality is possible and there are no transaction costs, then the efficient outcome can be achieved through a free market. If we are to consider ‘internalities’ in the same vein as externalities, then a similar argument may apply [54]. Trade between our present self and our future selves is fundamentally difficult since both do not exist at the same time, furthermore it generally is difficult to contract our future selves to a particular course of action. An important determinant of how a timeinconsistent agent will consume, is how well they understand their time inconsistency. The consumer may either be naive (not realizing that their preferences will change in the future), perfectly sophisticated (understanding perfectly their expected future path of preferences), or somewhere in between these extremes. If a consumer is perfectly sophisticated, then they may be able to seek out mechanisms by which to control
Obesity and time-inconsistent preferences their future selves, which generally mitigates the present-bias problems.8 The present self can take certain actions that will alter the decision payoffs for their future selves, and thus influence their future decisions [31]. Some relevant examples of these self-control mechanisms include purchasing gym membership [55] and betting on planned weight-loss [56]. What is interesting about both these studies is that people tend to not go to the gym enough to make membership worthwhile, and lose their bets to lose weight. Clearly they know that without these commitment devices they do not have the selfcontrol to achieve their goals, so they attempt to alter their payoffs so that they can achieve them, but they systematically underestimate their present-bias problem. Systematic underestimation of time-inconsistency problems can be explained by projection bias and visceral influences [27,29]. Read and van Leeuwen [30] show evidence of the fact that although people realize that hunger will affect their future choices, they systematically underestimate the influence of their hunger level on preferences. The fact that individuals often lack the ability to commit themselves to future actions means that externally imposed constraints can be valued. Ariely and Wertenbroch [57] found that students would voluntarily commit themselves to earlier submission deadlines than were necessary (with punishment for overshooting those deadlines). It is often difficult for the market to provide commitment devices over some actions, for example there is evidence of consumers who enter gambling self-exclusion programs still being allowed to gamble [58]. So even with sophisticated self-control behaviors in place, there may still be a use for government interventions of taxes, subsidies and regulations, as discussed in the previous section.
Policy implications Time-inconsistent preferences are just one of many economic rationales for intervention on the issue of obesity, and further build the case for action. The interaction between time-inconsistent preferences, as well as other rationality imperfections [13] and the other standard economic rationales [1,2] become important when assessing interventions and policy. It may be that a tax designed primarily to correct for some of the external costs 8 In some specific circumstances sophistication can exacerbate the problems of present-biased preferences. See for example O’Donoghue and Rabin [26,64].
87 of obesity is even more valuable due to its selfcontrol imposing properties, or on the other hand it may be that self-control problems are so great that the tax cannot affect behavior as intended. The unknown effects of policy change on complex internal bargaining between the present and future selves make the effects of obesity policies extremely complex, and certainly worthy of further study [54]. It should be remembered that our ultimate goal should be to increase the wellbeing of society, and the reduction of obesity is simply an intermediate goal. There exist many reasons for individuals to be obese; some may be obese primarily due to a true love of unhealthy food, others may be driven by self-control problems or lack of information. Clearly, if our goal is to increase welfare, then targeting behavioral interventions at the latter two groups is most desirable (assuming all other factors constant, and that the interventions are effective for these groups). Considering time-inconsistency in the construction of behavioral intervention programs may be able to increase their success rate. Guided by further research into how much of the obesity pandemic is due to self-control problems, it may be important to target this market imperfection directly. Self-control problems are often related to the vividness and saliency of present rewards, compared to the weak imaginings of future costs, so interventions targeted at either of these ends may be effective. These interventions could attempt to remove the temptation of the current reward by removing the stimuli, for example by moving vending machines to less conspicuous locations. On the other hand, perhaps inventive mechanisms could be designed to make the future health consequences of diet and exercise choices more vivid, similar to the use of graphic imagery on cigarette packaging [59,60]. Such targeted interventions could help improve welfare in the time-inconsistent group, but still allow individuals the freedom of personal choice based on their heterogenous preferences.
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M. Dodd [27] Loewenstein G. Out of control: visceral influences on behavior. Organizational Behavior and Human Decision Processes 1996;65(3):272—92. [28] Akerlof GA. Procrastination and obedience. The American Economic Review 1991;81(2):1—19. [29] Loewenstein G, O’Donoghue T, Rabin M. Projection bias in predicting future utility. The Quarterly Journal of Economics 2003;118:1209—48. [30] Read D, van Leeuwen B. Predicting hunger: the effects of appetite and delay on choice. Organizational Behavior and Human Decision Processes 1998;76(2):189—205. [31] Hoch SJ, Loewenstein GF. Time-inconsistent preferences and consumer self-control. The Journal of Consumer Research 1991;17(4):492—507. [32] Herrnstein RJ, Loewenstein GF, Prelec D, Vaughn W. Utility maximization and melioration: internalities in individual choice. Journal of Behavioral Decision Making 1993;6:149—85. [33] Nederkoorn C, Smulders FT, Havermans RC, Roefs A, Jansen A. Impulsivity in obese women. Appetite 2006;47:253—6. [34] Stutzer A. When temptation overwhelms will power: obesity and happiness. Working Paper, Conference on New Directions in the Study of Happiness; 2006. [35] Wonderlich SA, Connolly KM, Stice E. Impulsivity as a risk factor for eating disorder behavior: assessment implications with adolescents. International Journal of Eating Disorders 2004;36:172—82. [36] Ryden A, Sullivan M, Torgerson J, Karlsson J, Lindroos AK, Taft C. Severe obesity and personality: a comparative controlled study of personality traits. International Journal of Obesity 2003;27:1534—40. [37] Schelling TC. Self-command in practice, in policy, and in a theory of rational choice. The American Economic Review 1984;74(2):1—11. [38] O’Donoghue T, Rabin M. Optimal sin taxes. Journal of Public Economics 2006;90:1825—49. [39] O’Donoghue T, Rabin M. Studying optimal paternalism, illustrated by a model of sin taxes. The American Economic Review 2003;93(2):186. [40] Camerer C, Issacharoff S, Loewenstein G, O’Donoghue T, Rabin M. Regulation for conservatives: behavioral economics and the case for ‘‘asymmetric paternalism’’. University of Pennsylvania Law Review 2003;151(3): 1211—54. [41] Chouinard HH, Davis DE, LaFrance JT, Perloff JM. Fat taxes: big money for small change. Forum for Health Economics & Policy 2007;10(2). [42] Kuchler F, Tegene A, Harris JM. Taxing snack foods: manipulating diet quality or financing information programs? Review of Agricultural Economics 2005;27(1):4—20. [43] Marshall T. Exploring a fiscal food policy: the case of diet and ischaemic heart disease. BMJ 2000:320. [44] Jensen JD, Smed S. Cost-effective design of economic instruments in nutrition policy. International Journal of Behavioral Nutrition and Physical Activity 2007;4(10.). [45] Schroeter C, Lusk J, Tyner W. Determining the impact of food price and income changes on body weight. Journal of Health Economics 2008;27(1):45—68. [46] Caraher M, Cowburn G. Taxing food: implications for public health nutrition. Public Health Nutrition 2005;8(8): 1242—9. [47] Jacobson MF, Brownell KD. Small taxes on soft drinks and snack foods to promote health. American Journal of Public Health 2000;90(6):854—7. [48] Kim D, Kawachi I. Food taxation and pricing strategies to thin out the obesity epidemic. American Journal of Preventive Medicine 2006;30(5):430—7.
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Available online at www.sciencedirect.com
REVIEW
Obesity and time-inconsistent preferences Mark Dodd ∗ School of Economics, The University of Adelaide, SA 5005, Australia Received 12 March 2008; accepted 22 April 2008
KEYWORDS Obesity; Economics; Intertemporal choice
Summary As obesity becomes a major health and economic issue of the current age, interventions and policies are being targeted to influence individuals’ diet and exercise behaviors. Examining the deviations of reality from a baseline model of rational choice provides insights into the economic rationales for interventions to modify individuals’ choices. In addition to the more classical economic rationales for intervention, insights from behavioral economics and psychology have recently led to a focus on the role of time-inconsistent preferences, in particular presentbiased preferences, in the choices that lead to obesity. While individuals can use self-control techniques to mitigate the problem, there is also potential for targeted interventions and policies to improve the welfare of individuals. Further interdisciplinary research in the area may lead to behavioral obesity interventions tailored to individuals’ incentives, resulting in higher compliance rates. © 2008 Asian Oceanian Association for the Study of Obesity. Published by Elsevier Ltd. All rights reserved.
Contents Economic rationales for behavioral obesity interventions..................................................... Intertemporal choice and time-inconsistency ................................................................ Internalities and taxation .................................................................................... Self-control mechanisms and the Coase Theorem ............................................................ Policy implications ........................................................................................... References .................................................................................................
Economic rationales for behavioral obesity interventions It is well accepted that obesity is costly to individuals and society in terms of financial costs, life years, ∗
Tel.: +61 8 8303 4931; fax: +61 8 8223 1460. E-mail address: [email protected].
and quality of life. The fact that in most cases obesity can be influenced by lifestyle choices, including diet and exercise regimes, makes it an extremely complex issue. Consumer sovereignty is a concept often championed by economists. If a consumer makes an informed and rational choice to consume junk food, then attempting to modify this optimizing choice
1871-403X/$ — see front matter © 2008 Asian Oceanian Association for the Study of Obesity. Published by Elsevier Ltd. All rights reserved.
doi:10.1016/j.orcp.2008.04.006
83 84 85 86 87 87
84 will likely make the consumer worse off. We assume that this individual is attempting to maximize their utility (or well-being), and they will make the choice to consume only if the benefit they receive from the consumption exceeds the costs, which in the case of junk food should include all future health and financial costs caused by the addition to the waistline. Thus under a model of rational choice in a perfect world, we should assume that an individual’s exercise and diet choices should be optimal without any intervention. In this scenario, intervention by a third party into the individual’s decision process is not only unnecessary but is also likely to make the individual worse off, since the third party cannot perfectly know the individual’s preferences and thus is likely to unintentionally cause deviations from optimal choices. This hypothetical situation is not necessarily reflective of the real world, but it provides a benchmark from which to assess the relevance of intervention. For there to be an economic rationale for external interventions to be able to increase social welfare, they should attempt to mitigate the damage caused by market failures (the deviations from our ‘perfect’ scenario). To paraphrase two recent articles on this topic, these market failures in the case of obesity can be caused by externalities, information deficits, or imperfect rationality [1,2]. Optimal market outcomes are often based on concepts of efficiency, and only rather weak concepts of equity,1 so policy makers may also wish to intervene based on their own stronger beliefs regarding the distribution of personal welfare. Externalities occur when costs or benefits of a decision are incurred by parties external to the decision. In the case of obesity, the most commonly considered externality is that of a portion of an obese individual’s increased health care costs being funded by other taxpayers through public health care. Under this scenario individuals will rationally (implicitly) choose an inefficiently high level of obesity, since they do not consider the full costs of obesity, only the costs that they face personally. External costs can result not just from public health care, but also private health insurance, tax and social security systems, and in many other situations where obese individuals cost more but do not fully pay for this increased cost themselves. Theoretical modeling of the external costs and consequent deadweight loss to society, as well as estimating these costs has been undertaken by 1
Competitive market equilibria satisfy Pareto optimality, meaning that there do not exist other possible outcomes in which all individuals are at least as well off as in the equilibrium, but in which some are better off.
M. Dodd a number of researchers (e.g. [3—6]). It should be noted that many of the externalities of obesity are not inherent to the issue, but caused by certain ‘imperfections’ that have been built into the market. For example, in the case of health insurance, there would be no externality if obese individuals were forced to pay actuarially fair insurance premiums, that would be higher to take into account their expected future costs [3]. It is the regulations that make it impossible to charge different insurance premiums based on measures of obesity (such as community rating) that cause the externality problem in this case. Information about the consequences of overweight and obesity, as well as information about the effect of diet and exercise on health are likely to be under-provided in a competitive market. Much of this information is non-rival and nonexcludable, making it a ‘public good’ and therefore under-provided by a competitive market. There is evidence that food-labeling regulation can reduce weight [7], and that health knowledge is related to weight [8,9]. There is also a role for government in ensuring that misleading advertising is minimized, since this can clearly adversely affect choices [10]. The rational choice model does not propose that individuals make all their decisions by explicitly going through complex maximization processes. Rather, they will employ heuristics and other decision tools such that they will act optimally, as if they had maximized explicitly. There are potentially many sources of imperfections in rationality that can lead to suboptimal choices being made. Perhaps the most obvious in the case of obesity is the problem of time-inconsistent preferences, and this will be discussed in the following sections. Another problem is in the case of children, who may not have the capacity for complex rational decisionmaking, and for example, can be more influenced than adults by persuasive advertising [10,11]. There are potentially many other imperfections in rationality, including for example the tendency to eat more when presented with larger portion sizes [12—14]. It may also be considered that unhealthy choices are ‘addictive’ by certain definitions. Gruber and K¨ oszegi [15] contrast a model of rational addiction with a model of time-inconsistent preferences and find that they have much in common.
Intertemporal choice and time-inconsistency When immediate decisions of diet and activity are made, the individual should incorporate the
Obesity and time-inconsistent preferences future health consequences into their decisionmaking process. Therefore we need some theory of intertemporal choice, or of how wellbeing is compared between time periods. Samuelson [16] developed the model of exponential discounting, which means having a constant discount rate and represents time-consistent preferences.2 With exponential discounting, an increase in the discount rate would lead to a higher level of overweightness in the population, since the future health costs are discounted more when they are compared to the current (non-discounted) enjoyment [17]. It has been proposed that the increase in obesity in recent years may be due to a general increase in people’s discount rates, but no strong evidence of this has been found [18—20]. An excellent review of economic thought on time preferences, as well as the evidence against the exponential discounting model is given by Frederick et al. [21]. There is much evidence that people have time-inconsistent preferences, and in general, present-biased preferences.3 Strotz [22] was one of the earliest economists to formalize discussion of time-inconsistency. This area has since become a burgeoning field of literature in both economics and psychology [21,23,24]. There are many models that mathematically derive and investigate the theoretical suboptimal outcomes caused by present-biased preferences [25—28].4 There are also many papers discussing 2 If you had a constant annual discount rate with respect to money of 5%, then you would place the same value on $100 received today, on $105 received next year, and on $110.25(=$100 × 1.05 × 1.05) received the following year. Samuelson’s exponential discounting model proposes that a discount rate can be applied to utility in this way, and that the same discount rate is applied between every adjacent pair of periods (e.g. the 5% rate in our example; a counter example would be a case where the discount rate between year 1 and 2 is 5%, but the discount rate between year 2 and 3 is 4%). The time consistency that results from a constant discount rate means that (absent other changes) an optimal choice made for the future should still be the desired choice when the future time period is reached. 3 For example if one was asked today if they would prefer $100 in 10 years or $101 in 10 years and a day, then they may chose the later $101 payment, but 10 years from now if asked would they prefer $100 today or $101 tomorrow they would chose the earlier $100 payment. If this change is not based on the revelation of information or changed conditions, but only on the timing, then a person who acts like this has present-biased time-inconsistent preferences. 4 Many economic models of present-biased preferences are based on a quasi-hyperbolic discounting functional form, developed by Phelps and Pollak [61] in an intergenerational setting, and brought to the within-individual intertemporal choice setting by Laibson [62]. This functional specification succinctly captures the qualitative aspects of present-biased preferences by allowing for the same discount rate amongst each adjacent
85 the underlying fundamental psychological determinants of these types of preferences, including projection bias, reference points, visceral influences, melioration and impulsivity [24,27,29—32]. In the case of obesity there are still few empirical results to back up the theory, so more research is needed. Nederkoorn et al. [33] find evidence that obese women tend to have higher than normal impulsivity by one particular measure, but not by other measures. Stutzer [34] finds, using proxies for ‘experienced utility’,5 that obesity reduces wellbeing only for those who report limited self-control, thus providing evidence of an obesity-related selfcontrol problem leading to suboptimal outcomes. Wonderlich et al. [35] find a positive relationship between a behavioral measure of impulsivity and eating disorders. Ryden et al. [36] find a positive relationship between obesity and impulsivity for men only. Other evidence involves the ‘smoking guns’ of costly self-control behaviors, that logically would not be necessary were this problem not to exist, and these are discussed in greater detail in the self-control mechanisms and the Coase Theorem section.
Internalities and taxation The most basic potential outcome of presentbiased preferences is, that when planning for future actions an individual may optimally wish to choose a healthy diet and lifestyle, but at every instant will be overpowered by their present bias and wish to eat unhealthily and be inactive, leaving the healthy lifestyle to start tomorrow. If we are trying to maximize the individual’s welfare, it is difficult to know how to weight the conflicting interests of the longterm planner and the present doer [37]. It is usually proposed that the decisions that would be made by an individual planning for the future would be the most ‘correct’, and welfare analysis is often based on this, although this should not be taken for granted [28,37]. Essentially, when choosing to consume unhealthy foods, the present self is imposing ‘external’ costs on the long-term self.6 The term ‘internality’ has recently been coined to describe this situation,
future period, but a different discount rate between the present and the first future period. 5 As the phrase suggests, experienced utility is the actual experienced ‘hedonic quality’, and may differ from the ex ante expected utility used in decision-making [63]. Stutzer [34] uses subjective reports of wellbeing as a proxy for experienced utility. 6 The multiple-self model clearly is just a useful theoretical construct and is not intended to be taken too literally.
86 evoking similarities with the more commonly considered case of an externality [32]. A classic solution to an externality problem is to use a tax to increase the costs personally faced by the producer of the external costs to the full social cost, thus ‘internalizing’ the external costs and leading to the socially optimal level of consumption and production (a carbon tax is a good example of this). Similar to a ‘Pigouvian’ tax on an externality as described, it has been proposed that optimal taxes can be put in place to improve welfare in the face of an internality problem, with even those bearing the tax potentially supporting it due to its self-control functions [38—40]. It may be possible to put in place a tax that results in a Pareto improvement over the pre-tax state, that is, everyone is at least as well off as before, and some are better off. O’Donoghue and Rabin [38] describes such a scheme, whereby the selfcontrolled are better off due to a redistribution of wealth to them from the people with self-control problems (since the tax is borne more by those with self-control problems), yet the people with selfcontrol problems are better off since their gain in utility from the externally imposed influence reducing their self-control problems is greater than the loss from taxation.7 Although possible, it is highly problematic to tax obesity directly, and instead the usual proposition is to tax products that cause obesity, such as junk foods. Since relative prices are important in consumption decisions, subsidies (which are basically negative taxes) on healthy products could perform a similar function. Some theoretical and calibrated modeling has been done on the issue of a ‘fat tax’ [41—45], and there has been much discussion of the complex issue in the literature [46—49]. French et al. [50] show that consumption of healthy snack foods can increase significantly with relative price cuts. Cutler et al. [51] suggest that changes in the relative costs of foods (including time-costs) driven by technological change may be a leading explanation for the rise in obesity over recent years. The reduction in food costs has been biased towards unhealthy foods, and worryingly, there is evidence that the relative cheapness of unhealthy foods is still increasing [52]. An important factor to consider is the responsiveness of consumer demand to prices of obesity encouraging products. If the consumers with selfcontrol problems in fact are not sensitive to price, 7
Another interesting result from the modeling and calibration exercises of O’Donoghue and Rabin [38] is that the optimal tax may still be quite large even when self-control problems are quite small.
M. Dodd then taxation will not perform its self control function, instead penalizing further those with selfcontrol problems. How responsive consumers will be to a ‘fat tax’ depends specifically on how it is constructed. Whether any tax will be borne by the consumers or the producers is another important issue, as well as the intended and unintended effects of the tax on the content of the food produced. And of course, there are equity issues involved since any food tax tends to be regressive. However in the similar case of cigarette taxation, it has been argued that this internality effect makes the taxes less regressive, since the price elasticity of demand for cigarettes will be higher for lower income individuals, and thus the tax will have a greater self-control effect for them [53]. Current estimates of the price elasticity of demand for particular goods or categories of goods will not necessarily be good predictors in a completely different price environment where a large group of goods are priced differently, due to the complex substitution amongst goods. Most proposed schemes of taxes and subsidies will lead to price environments sufficiently different to the current environment such that current estimated elasticities may not be appropriately applied in those contexts, and thus detailed and specifically tailored analysis of any such scheme is essential.
Self-control mechanisms and the Coase Theorem The Coase Theorem states that when trade in an externality is possible and there are no transaction costs, then the efficient outcome can be achieved through a free market. If we are to consider ‘internalities’ in the same vein as externalities, then a similar argument may apply [54]. Trade between our present self and our future selves is fundamentally difficult since both do not exist at the same time, furthermore it generally is difficult to contract our future selves to a particular course of action. An important determinant of how a timeinconsistent agent will consume, is how well they understand their time inconsistency. The consumer may either be naive (not realizing that their preferences will change in the future), perfectly sophisticated (understanding perfectly their expected future path of preferences), or somewhere in between these extremes. If a consumer is perfectly sophisticated, then they may be able to seek out mechanisms by which to control
Obesity and time-inconsistent preferences their future selves, which generally mitigates the present-bias problems.8 The present self can take certain actions that will alter the decision payoffs for their future selves, and thus influence their future decisions [31]. Some relevant examples of these self-control mechanisms include purchasing gym membership [55] and betting on planned weight-loss [56]. What is interesting about both these studies is that people tend to not go to the gym enough to make membership worthwhile, and lose their bets to lose weight. Clearly they know that without these commitment devices they do not have the selfcontrol to achieve their goals, so they attempt to alter their payoffs so that they can achieve them, but they systematically underestimate their present-bias problem. Systematic underestimation of time-inconsistency problems can be explained by projection bias and visceral influences [27,29]. Read and van Leeuwen [30] show evidence of the fact that although people realize that hunger will affect their future choices, they systematically underestimate the influence of their hunger level on preferences. The fact that individuals often lack the ability to commit themselves to future actions means that externally imposed constraints can be valued. Ariely and Wertenbroch [57] found that students would voluntarily commit themselves to earlier submission deadlines than were necessary (with punishment for overshooting those deadlines). It is often difficult for the market to provide commitment devices over some actions, for example there is evidence of consumers who enter gambling self-exclusion programs still being allowed to gamble [58]. So even with sophisticated self-control behaviors in place, there may still be a use for government interventions of taxes, subsidies and regulations, as discussed in the previous section.
Policy implications Time-inconsistent preferences are just one of many economic rationales for intervention on the issue of obesity, and further build the case for action. The interaction between time-inconsistent preferences, as well as other rationality imperfections [13] and the other standard economic rationales [1,2] become important when assessing interventions and policy. It may be that a tax designed primarily to correct for some of the external costs 8 In some specific circumstances sophistication can exacerbate the problems of present-biased preferences. See for example O’Donoghue and Rabin [26,64].
87 of obesity is even more valuable due to its selfcontrol imposing properties, or on the other hand it may be that self-control problems are so great that the tax cannot affect behavior as intended. The unknown effects of policy change on complex internal bargaining between the present and future selves make the effects of obesity policies extremely complex, and certainly worthy of further study [54]. It should be remembered that our ultimate goal should be to increase the wellbeing of society, and the reduction of obesity is simply an intermediate goal. There exist many reasons for individuals to be obese; some may be obese primarily due to a true love of unhealthy food, others may be driven by self-control problems or lack of information. Clearly, if our goal is to increase welfare, then targeting behavioral interventions at the latter two groups is most desirable (assuming all other factors constant, and that the interventions are effective for these groups). Considering time-inconsistency in the construction of behavioral intervention programs may be able to increase their success rate. Guided by further research into how much of the obesity pandemic is due to self-control problems, it may be important to target this market imperfection directly. Self-control problems are often related to the vividness and saliency of present rewards, compared to the weak imaginings of future costs, so interventions targeted at either of these ends may be effective. These interventions could attempt to remove the temptation of the current reward by removing the stimuli, for example by moving vending machines to less conspicuous locations. On the other hand, perhaps inventive mechanisms could be designed to make the future health consequences of diet and exercise choices more vivid, similar to the use of graphic imagery on cigarette packaging [59,60]. Such targeted interventions could help improve welfare in the time-inconsistent group, but still allow individuals the freedom of personal choice based on their heterogenous preferences.
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